consumption is offset by growth in export markets, quotas
could be decreased even further in future years. The domestic
consumption impacts of already-announced cigarette price
increases, thus, need to be brought into consideration when
the tobacco program and the future of tobacco producers are
being discussed, debated, and analyzed.
The nature of the impact of price increases for cigarettes
on producers will depend on whether the traditional tobacco
program is in place. If the current program of controlling
supply by announced quotas and supporting prices is
continued, the impact of the price increases will be in the
form of further quota reductions. Historically, rapid growth
in exports has sometimes offset declines in domestic
consumption, but exports may not increase that fast in 2000
and beyond. The price increase is at unprecedented levels
and will prompt long-term, cumulative reductions in domestic
consumption. The young men and women who do not start
smoking in 1999 will be added to by a significant and
additional set of young men and women who do not start
smoking in 2000. The 1999 reduction in consumption may
not be huge, but the cumulative effect by the year 2005 will
be huge. If the program is still in place, quota cuts beyond
2000 will likely bring further consolidation of farms and
accentuate the exit of farms, especially small farms, from
tobacco production.
The longer run and cumulative effect of the price increase
could help prompt more quota cuts in coming years.
If the tobacco program is abolished, the impacts will
come more nearly in the form of declines in tobacco prices.
Manufacturers will contract with producers at prices
consistent with global prices and world trade possibilities.
The Economic Research Service estimated the cost of
producing flue-cured tobacco, excluding land and quota costs,
at $1.35 per pound for 1997 (ERS). Selling prices in recent
years have varied from the low $1.70s to the low $1.80s. A
price of $1.75 is $0.40 above the per pound costs. In
agricultural commodities in a deregulated global marketplace,
United States commodity prices always tend to go down
toward world prices or to the cost of production. Any price
above costs represents economic rent (sometimes called
excess profits) and cannot be sustained unless a barrier to
expanded production—such as the current tobacco
program—exists. The lower prices will have essentially the
same impact on producers’ revenue as program-related
quota cuts. Small-scale farmers will be forced out as
production is consolidated in larger units that can reap
economies of size, push costs down, and compete. The
location of United States production would also be different.
The current tobacco program prohibits production from
moving freely from one geographic area to another. Without
the program, production will move to areas where costs of
production are low, possibly including areas where tobacco
is not currently produced.
If the tobacco program is eliminated, lower prices will
force higher cost producers out of business and could
change where tobacco is produced in the United States.
Price is an important economic force. The 1993 price
cuts protected United States manufacturers from further
reductions in consumption, protection that lasted into 1997.
Conversely, the 1998 price increase for cigarettes will start
a round of responses that eventually will significantly reduce
domestic consumption of cigarettes. The 1998 pricing
decision will accelerate the trends away from smoking that
started in 1981, and those 1998 pricing decisions will
accelerate adjustments at the producer level. Local, state,
and national policy makers need to fully understand what is
happening and reflect that insight and understanding in their
tobacco-use education programs, in their decisions on the
tobacco program, and in their decisions on efforts to assist
producers and producing communities who will bear the
brunt of coming adjustments.
References
Chaloupka, Frank J. and Michael Grossman. “Price,
Tobacco Control Policies and Youth Smoking,” Working
Paper 5740, National Bureau of Economic Research, Inc.,
Working Paper Series, Cambridge, MA, September 1996,
39 pp.
ERS, USDA. Tobacco Briefing Room, April 21, 1999:
http://www.econ.ag.gov/Briefing/tobacco, (Table 8—
Wholesale premium brand cigarette price revisions, 1990-
98).